In schweser, in reading 67 (PM), when describing Treynor Black… RE: The graph showing A the actively managed portifolio, P the optimal risky portfolio and M the passive index portfolio along the efficient frontier… A, the actively managed one, produces a return/risk less “efficient” than the CAL. Why is that? I thought by actively managing a portfolio, giving weighting to high alpha, low risk assets the portfolio would be the optimal one and therefore lie where P does, on a tangent to the CAL? Am I missing something really obvious here? Thanks

I understand it as: A = actively managed portfolio (assume low number of stocks with positive or negative alpha). by itself, A is not efficient. M = market portfolio A+M = optimal risky portfolio Combine A+M with risk free asset to get a portfolio that is more efficient than just M+risk free.

The “A” portfolio is drawn on a curve, similar to the CML. If you drew a line from the risk free asset to the optimal portfolio, P, you would see that portfolio along the CAL would dominate portfolio along the curve.

Of course! Duh. A has small no of assets and isn’t efficient by itself… Thank you!